Cyprus bailout terms open nightmare scenario

The move to seize almost €6 billion from bank depositors in Cyprus marks an extraordinary change of course for the Eu ropean authorities. After a few months of relative calm in the euro zone, the development threatens a new upsurge of volatility.

The deal struck in the pre-dawn hours on Saturday would have seen 6.75 per cent wiped from all deposits under €100,000 and a further 9.9 per cent taken from deposits exceeding that amount. Whatever the eventual outcome of fevered efforts in Nicosia to provide a belated measure of protection to people with modest deposits, the damage is done.

Despite insistent claims that the Cypriot case is unique, the inevitable conclusion is that bank deposits are no longer sacrosanct in the battle to shore up the single currency. This may be no more than an implicit threat in the most extreme of scenarios, but that’s all that is required to undermine confidence in a time of acute crisis.

This is no overstatement. With the fragile situation in Italy and Spain unresolved, the danger now is that people in those countries might dash to withdraw their money if turbulence suddenly returns. That is the stuff of nightmare.

It is in the nature of such actions that they tend to be self-fulfilling, with risks snowballing quickly. What is more, the euro zone crisis has shown again and again that the weakness of one country in a currency union is the weakness of all.

Not for nothing was it an article of faith in the European Union – until last weekend, at least – to maintain something approaching absolute protection over deposits. Similarly, the gradual unwinding of the fateful Irish bank guarantee has been accompanied by repeated
Government reassurances that deposits up to €100,000 remain under State protection.

There is good reason for that. Only one week has passed since the Government sold long-term Irish debt for the first time in years. If calm in the euro zone is a prerequisite for a full return to private markets later this year then the turmoil in Nicosia is most unwelcome.

The failure to distinguish between the small-time savings of regular Cypriots and the vast holdings of Russian and other international depositors remains deeply perplexing. Not only does it smack of a political tin ear at the centre of European power, but there is wilful negligence too. How does this sit with the drive to eventually provide pan-European deposit protection under the “banking union” initiative? Not well at all – and the banking union has been billed as the final salvation of the single currency.

Crisis
Far from promoting stability in Cyprus and beyond, the deal has led to a dangerous political crisis on the island and the temporary closure of its banks and prompted worry about another wave of contagion sweeping through the euro zone’s brittle financial system. Markets are struggling to maintain their composure, and the sense remains that this will go down as yet another instance of EU leaders making things a good deal worse when they were trying to make them better.

Yes, the ever-increasing burden of adjustment throughout the EU has been borne by ordinary people. This is the case in respect of new property and water taxes in Ireland, the Croke Park pay cuts, the raid on pension funds and all the other measures to assert control over the public finances.